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3 Reasons to Avoid Nokia Stock as It Loses Steam in the 5G Race

Analysts and investors really want to give Nokia (NYSE:NOK) a chance. But it seems that the Finnish multinational telecommunications giant doesn’t want to make it easy for us. Readers of this space will know that I believe Nokia stock is in a good position to grow in the 5G boom.

Dark clouds over Nokia (NOK) brand name on top of a building in Helsinki, Finland

Source: RistoH / Shutterstock.com

However, the company’s recent missteps are scaring investors. And that’s not a great position to be in, especially considering Nokia’s history.

Pekka Lundmark, Nokia’s new CEO, understands the issues at hand, but the markets want to see some action as well. Yes, the stock is cheap, but that’s not a compelling argument for stockholders who want to see an increase in shareholder value.

That involves beating estimates, cutting costs, and reinstating the dividend. At this point, though, Nokia seems to be content in having a more passive approach. I don’t think that it does Nokia stock any favors.

Ultimately, no matter how much hype you create, stock markets operate in a very democratic fashion. If a company performs well, then markets automatically reward it with a boost in stock price. If not, then no amount of PR can do you any good.

Earnings Need a Facelift for Nokia Stock to Soar

The chart shows the price performance of Nokia (NYSE:NOK) stock concerning the EPS.

Source: Chart courtesy of StockRover.com

A classic case happened to Genius Brands’ stock after the bubble burst regarding CEO Andy Heyward’s frequent press releases and positive spin. But that is fodder for another time.

The bottom line? Performance pays, as you can see from the chart. As soon as earnings drop and the company beats estimates, you see positive momentum.

And when it’s vice versa, as was the case with Nokia this go around, then you see the stock price go south. NOK stock dropped 13% after the latest earnings report. Adjusted operating profit came in at 486 million euros, missing analyst estimates of 496 million euros. Meanwhile, adjusted operating margin and adjusted gross margin came in at 9.2% and 37.4%, both missing estimates of 9.08% and 38.5%, respectively.

Looking ahead, the management offered muted commentary for the current year as well as the next. For 2020, Nokia expects adjusted earnings per share in the range of €20 cents to €26 cents, compared with €20 cents to €30 cents previously. Meanwhile, the adjusted operating margin is forecasted to land between 8% and 10%, compared with an earlier 8% to 11% estimate.

The next year, it anticipates an adjusted operating margin of between 7% and 10%, which compares unfavorably with an average analyst estimate of 10.6%.

Although Lundmark did say the company is looking to do “whatever it takes” to regain dominance in the sector, the figures do not bail him out.

Not Reinstating the Dividend Is Hurting the Company

The other big talking point coming out of earnings was the dividend situation. Originally, Nokia halted the dividend to satisfy the burgeoning costs of rolling out equipment for 5G mobile networks. That made sense since the completion within the sector is intense.

Huawei Technologies and Ericsson (NASDAQ:ERIC), and Nokia are the major players in this race. If you break it down in terms of geography, Nokia and Ericsson will fight it amongst themselves in Europe. Huawei will find it tough competing there due to heightened regulations. The same can be said for the U.S., where it is under intense scrutiny. But the U.S. market is also highly consolidated, making it tough to create inroads.

Huawei is a major player in its home state of China. The company has won a majority of contracts awarded in that country so far. The Chinese are famous for backing their local companies, so expect this trend to continue.

These companies are also fighting on margins. So, pricing has to be razor-sharp to compete in these markets. That puts additional pressure on Nokia.

So, with all that in mind, the dividend suspension was somewhat understandable, but the situation is now different. Nokia ended its most recent quarter with a net cash balance of €1.9 billion. According to Lundmark, once the company reaches €2 billion, it will think about resuming the distribution.

In my mind, that’s a bad move. With Nokia losing contracts left, right, and center, this was the perfect time to send some positive news into the markets.

Losing Contracts

Samsung Electronics (OTCMKTS:SSNLF) recently won a $6.6 billion contract to provide 5G wireless solutions to Verizon Communications (NYSE:VZ). The deal is seen as a major blow to Nokia because of its close association with Verizon. However, Nokia announced some small deals after the arrangement was made public. It did not take the sting out of the announcement.

With margins shrinking, Nokia will have to think out of the box to get out of this situation. Investors are losing patience, and they want to see some big wins before rewarding the stock. Unless that happens, the slide will continue.

“We have lost share at one large North American customer, see some margin pressure in that market, and believe we need to increase R&D investments further to ensure leadership in 5G,” Lundmark said, acknowledging the loss. Lundmark said, .

Momentum Fading Away

The chart shows the price performance of Nokia (NYSE:NOK) stock concerning the EPS.

Source: Chart courtesy of StockRover.com

Nokia remains in a good position amidst the 5G rollout. But it was in a much better one just a few months ago. Nokia should understand that analysts and investors are jittery regarding its past and don’t want a repeat of what happened a decade ago.

Shares are trading at a discount to the sector and the other companies in the 5G space. But it’s losing momentum fast. The company doesn’t want to have an “also-ran” status entering 2021. For its part, the company and Lundmark have made it clear that it understands its predicament. Here’s hoping that this realization transforms into performance.

For now, I have to give a “neutral” rating on Nokia stock.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.

Article printed from InvestorPlace Media, https://investorplace.com/2020/11/3-reasons-to-avoid-nokia-stock-as-it-loses-steam-in-the-5g-race/.

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